Toward A ‘Responsible’ Future: Reframing and...

R EFR AMI N G AN D R EFO R MI N G THE GO VER N AN CE O F FI N AN CI AL MAR KETSMELVI N J DUBN I CK

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Toward A ‘Responsible’ Future:Reframing and Reforming the Governance

of Financial Markets

MELVIN J DUBNICK*

A. Introduction

On 17 June 2009, the White House officially launched its proposals for reforming thefederal government’s approach to reform oversight of the banking industry and financialmarkets.1 It promised to be the most significant overhaul of any US regulatory system innearly 80 years, and involved structural and jurisdictional changes that (if passed andimplemented) would transform the way both government and the entire financial sectorconducted business in the US and globally.

Reflecting the strategic and politically pragmatic orientation of the Obama Adminis-tration, this was no mere ‘pie-in-the-sky’ plan that could be easily blocked and dismissedby the powerful forces in and around Congress that typically find ways to emasculate—ifnot effectively pre-empt—such schemes. The concerns and/or displeasure of potentialopponents from most quarters had been considered, and few if any of the main playerscomplained that they had not been consulted or their ideas given serious consideration. Asone measure of how well the Administration had designed the plan for a soft landing onthe political runway, Wall Street indicators such as the Dow Jones average barely registeredan impact that day despite the transformational nature of what the White House had puton the table.

Although many of the specifics of the Obama plan for reform are likely to be modifiedas proposals wend their way through the policy-making process, few doubt or challengethe basic premise of the effort: the regulatory system focused on the financial sector in theUS is broken to the extent that it requires major repairs. It demanded a regulatory systemoverhaul that will prevent a recurrence of a situation that had developed over the yearsand came to a critical head the previous fall with the collapse of several major firms and a‘freeze’ of the credit markets that effectively converted an emerging recession into what

1 US Department of the Treasury, ‘Financial Regulatory Reform: A New Foundation’ (2009).

* Professor of Political Science, University of New Hampshire.

many analysts term an economic depression.2 In this chapter I argue that this attempt atreform will not, in fact, achieve that objective, but not for the reasons most of its criticsoffer. Among the critics, the proposals either go too far or do not go far enough in thechanges they will bring about. In contrast, I contend that the problems facing thesereforms are not a matter of too much or too little reform, but rather an unfocused (andmisfocused) approach to reform.

The current efforts to design relevant reforms of the troubled financial markets both inthe US and abroad are preoccupied with repairing a fundamentally flawed set of policies.There will no doubt be some initial sense of accomplishment as regulatory jurisdictionsare reorganised and regulatory agencies are created and or shuffled about in a reformscheme that seems radical on the surface, but only because it is in fact superficial.

After a brief consideration of the dynamics of the ‘blame game’ that is generating andshaping most of the reform agenda in Washington, London and elsewhere, I make the casefor an approach that goes beyond mere tinkering with traditional regulatory mechanismsand instead focuses on the need to reform the ‘governance’ of the financial sector. Thisperspective requires that we shift and raise our sights from the arena of institutions andregulatory mechanisms to the domain of governance regimes. Further, I make the case forthe existence of two interrelated regimes that require attention if we are to make anyheadway in the design of relevant and effective reforms. One of those regimes—theregulatory, which focuses on governance through control—has already received consid-erable attention from analysts, and I highlight one effort (by Hood, Rothstein and Baldwin(HRB), referred to in more detail below) at framing the elements of that regime. The otherregime—accountability, which fosters governance through responsibility—requires moreanalytic attention, and I offer the foundations for a framework the seeks to emulate theHRB effort. I conclude by offering some basic ‘design principles’ that need to be kept inmind as we deal with the future of financial market governance.

B. Random Fishing in the Accountability Stream

‘It isn’t that they can’t see the solution. It is that they can’t see the problem’ (GK Chesterton)

Developing long-term and appropriate solutions to the current financial crisis requires athorough assessment of the problems that generated the situation. Given the complexity ofdomestic and global financial markets, even the most knowledgeable minds of the era findthe analytic challenge overwhelming.3

In lieu of some consensus on credible paradigmatic framing of the crisis, policymakershave found other means for filling the ‘problem definition gap’.4 Thus, although one would

402 Reframing and Reforming the Governance of Financial Markets

2 At the start of the crisis there was considerable debate about whether the US economy was technically in a‘recession’—a debate nurtured by the rather formal process put in place for declaring that condition. Once thathurdle was completed, the term ‘depression’ was put into play by analysts and commentators. See ‘DiagnosingDepression; Economics Focus 2009’, The Economist, 1 March 2009; see also RA Posner, A Failure of Capitalism:The Crisis of ’08 and the Descent into Depression (Cambridge, MA, Harvard University Press, 2009).

3 Economists and other analysts were similarly perplexed during the initial stages of the Great Depression.Keynes drew so much attention because his perspective seemed to fill a void created by the failure of extanttheories and models.

4 On the nature and dynamics of problem definition, see D Dery, Problem Definition in Policy Analysis(Lawrence KS, University Press of Kansas, 1984); R Hoppe, ‘Cultures of Public Policy Problems’ (2002) 4 Journal

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hope for a more rational approach to designing policies that might prevent any futurerecurrence of the current problems, we are currently engaged in multiple ‘blame games’that will invariably influence the shape of government regulation of financial markets forthe foreseeable future.

Beyond the well-studied dynamics of political blame avoidance,5 driving the emergenceof ‘blame games’ during times of crisis is the pressure policymakers feel as they attempt tofill the gap created by ignorance or uncertainty about the problematic situation they arefacing.6

To make matters more complicated, those who assume the task of designing policyresponses face a range of ontological choices. At one extreme is the assumption that theuniverse generates problems (eg crises, disasters) randomly—that is, ‘stuff happens’without any explicable explanation and the best we can do collectively is prepare for thoseeventualities that seem to have a greater probability of occurring. A second extremeposition—let us call it the ‘acts of god(s)’ perspective—views the universe as subject to thewhims and unfathomable logic of some supernatural beings or forces that cannot besubjected to our powers of understanding. The best we can do under such assumedcircumstances is prepare for any eventuality and engage in considerable praying orperhaps some ritual sacrifices.

Modern policy designers (at least those who accept the basic premises of the Enlight-enment) assume some position between those two extremes, which ideally requires acareful analysis of a problematic condition so as to determine those causal factors whichcan be addressed by policy actions—or at minimum those factors that can be addressed bypolicies designed to ameliorate the consequences or prevent a recurrence.7 For students ofthe policy design process, the fact that the universe provides few opportunities forapplying objective analysis leads to a fall-back position relying on the social constructionof problematic realities that can be subjected to some policy fix. Even here, however,uncertainty (and thus controversy) rules unless there exists some ‘theory’ or ‘model’powerful enough to preclude or direct debates over those factors that policies need toaddress. Here is where the ‘blame game’ typically enters the picture.

Melvin J Dubnick 403

of Comparative Policy Analysis 305; DR Rochefort and RW Cobb (eds), The Politics of Problem Definition: Shapingthe Policy Agenda (Lawrence, KS, University Press of Kansas, 1994).

5 See, eg C Hood, ‘The Risk Game and the Blame Game’ (2002) 37 Government and Opposition 15; DL Weimer,‘The Puzzle of Private Rulemaking: Expertise, Flexibility, and Blame Avoidance in US Regulation’ (2006) 66Public Administration Review 569; R Ellis, Presidential Lightning Rods: The Politics of Blame Avoidance Studies inGovernment and Public Policy (Lawrence, KS, University Press of Kansas, 1994); KM McGraw, ‘Managing Blame:An Experimental Test of the Effects of Political Accounts’ (1991) 85 American Political Science Review 1133;KM McGraw, ‘Avoiding Blame: An Experimental Investigation of Political Excuses and Justifications’ (1990) 20British Journal of Political Science 119.

6 Studies of the blame game and similar concepts (eg hindsight causal analysis, attribution, issue responsi-bility) include S Iyengar, Is Anyone Responsible? How Television Frames Political Issues (Chicago, IL, University ofChicago Press, 1991); S Iyengar, ‘Framing Responsibility for Political Issues’ (1996) 546 Annals of the AmericanAcademy of Political and Social Science 59; JJ Strange and CC Leung, ‘How Anecdotal Accounts in News and inFiction Can Influence Judgments of a Social Problem’s Urgency, Causes, and Cures’ (1999) 25 Personality andSocial Psychology Bulletin 436; S Knobloch-Westerwick and LD Taylor, ‘The Blame Game: Elements of CausalAttribution and Its Impact on Siding with Agents in the News’ (2008) 35 Communication Research 723. See alsoDA Kysar and TO McGarity, ‘Did Nepa Drown New Orleans? The Levees, the Blame Game, and the Hazards ofHindsight’ (2006) 56 Duke Law Journal 179.

7 For a positive expression of this agenda, see D Lerner and HD Lasswell (eds), The Policy Sciences; RecentDevelopments in Scope and Method (Stanford, CA, Stanford University Press, 1951) and Y Dror, Design for PolicySciences (New York, American Elsevier, 1971); Y Dror, ‘Prolegomena to Policy Sciences’ (1970) 1 Policy Sciences135.

The ‘games’ themselves are part of a cultural phenomenon basic to modern societiesfixated on determining and dealing with the causes of our collective ills. At least in therealm of public policy, secularisation and ‘scientism’ have for the most part deposed mostforms of fatalism and replaced them with a pragmatic belief that public problems can beanalysed and ameliorated, if not actually ‘fixed’.

Put otherwise, the salience of these games reflects an inherent bias in ourpolicy-making process that seeks out a causal factor that can be acted upon. The urge totake collective (policy) action to deal with a public problem reflects the perceived possi-bility of taking effective action—and this, in turn, requires some sense of a link betweensome factor that can be acted upon and the problem. Deborah Stone8 provides a simplebut insightful view of options offered in her four types of ‘causal theories’ underlyingpublic policies (see Figure 1). Assuming some degree of consensus among policymakersregarding who or what ‘caused’ (ie is to blame for) the problem at hand, these ‘theories’can have considerable impact on the form and content of resulting decisions. Blamegames emerge where such a consensus is lacking, the result being a political struggle todefine the cause and (eventually) policy choices that reflect the competition amongconflicting views.

In the current debate over the financial meltdown, these ‘games’ have taken a variety offorms—from well thought out studies to blogger rants to Oxford-style debates—and not


8 DA Stone, Policy Paradox: The Art of Political Decision Making, 2nd edn (New York, WW Norton, 1997) 285.

surprisingly are leading to the conclusion that both everyone and no one has some causalresponsibility to bear. Was it Wall Street’s fault for taking advantage of newly createdinstruments and schemes to create a bubble that would eventually burst, or was itWashington’s (or London’s or Paris’s) fault for letting down its regulatory guard allowingthe banks to run bullishly through the markets? Or perhaps it was the fault of the MainStreet folks who let themselves be conned into believing that home values would riseforever and that there were no risks in taking on the debt obligations of a new mortgage orever higher credit card balances. A convincing argument has also been made for placingthe blame at the systemic level where the interconnectedness of globalised financialmarkets made the entire network vulnerable to collapse once a critical link (in this case,most point to the US housing market) weakened.

Whatever one can conclude from these various finger-pointing exercises, the signifi-cance of these blame games in shaping the causal theories (that will, in turn, shape futurepolicy) might be substantial. Without a consensus view or coherent framing of whatcaused the present crisis, we should not be surprised to see the emergence of a ‘hodgepodge’ set of proposals that reflect political bargaining and compromise rather than whateconomists regard as an effective and coherent package of solutions.9

That noted, the resulting ‘hodge podge’ is not without its common thread. If one wereto focus on the rhetoric used to rationalise proposals put forth by the White House andothers, it would be clear that solutions proffered by a variety of politicians and experts relyon actions designed to improve accountability. The underlying logic is simple and sensibleon its face: once we determine (correctly or incorrectly) that someone or some agency orsome process is to blame, the steps taken to prevent or mitigate a future recurrence mustnecessarily include some account-giving mechanisms.

But here, too, the lack of a more developed framing logic proves problematic fordesigning policy solutions. The issue of which accountability mechanisms are relevant tothe current financial crisis remains an open question. What does it mean to demand‘greater accountability’ of the various actors in the financial services industry? The typicalresponses to that question generate a plethora of ‘usual suspects’. We want thoseinvolved—whether bankers or regulators or customers—to assume greater ‘responsibility’for their actions. At the same time, we desire that each be ‘answerable’ to their respectiveprincipals—shareholders for the bankers and the public for the regulators. For bankersand others in the corporate sector of this domain, we require that they live up to thefiduciary ‘obligations’ they assumed when taking on their respective positions. As for theregulators, we assume they will be ‘responsive’ to the concerns and complaints broughtbefore them. And for those bankers or regulators or customers who might attempt tocircumvent or undermine the mechanisms established for those various purposes, we wantthem to be ‘liable’ for the consequences of their possible mis/malfeasances.

The argument I offer here is that, without some effort to define the problems beingaddressed in a clear and coherent way, reforming the financial services industry by estab-lishing greater accountability will prove difficult at best. The general rhetoric of reform,however, has not fostered any such clarity. ‘Make them [more] accountable’ is the clarioncall from all corners of the policy-making world. And, at least to this point in the crisis,


9 By the spring of 2009, the main discussion among economists had moved from the academic journals toeditorial op-ed pages, the internet and comments made on podcasts and mass media business news shows.Despite criticisms of government proposals that emerged from the blame game, many of the same expertscontributed to the cacophony that generated the many and varied proposals.

that rhetorical theme has trumped any effort to focus attention on exactly what it is wewish to accomplish by declaring our desire for more accountability.

For many students of the public policy-making process, the present situation confirmsthe growing popularity of what is called the ‘garbage can model’ (GCM) ofdecision-making. Originally articulated as a model to explain decision-making in‘organised anarchies’ such as universities,10 GCM has been transformed into a widely usedmodel of the complex policy-making process in the US which has features resemblinganarchical arrangements. Perhaps the best known of these GCMs was developed byJohn Kingdon,11 who described the process as involving three independent ‘streams’: a‘problem’ stream, representing the current flow of issues of potential interest to policy-makers; a ‘policy’ stream of possible solutions, many seeking a problem to deal with; and a‘political’ stream of various actors whose interests and activities vary over time. ForKingdon and others who use this model, the adoption of a policy involves a fortuitousconvergence of these three streams during a ‘window of opportunity’ when all threehappen to flow together.

Applied within a particular ‘policy domain’ such as the reform of financial markets, thismultiple streams model helps us make sense of the current situation where the ongoingblame game is generating multiple problems (related to a range of accountabilitydeficiencies) to be ‘solved’, with policymakers responding by throwing various account-ability-based solutions at those situations that seem to be the most salient at a givenmoment.

Perhaps the most obvious example is the recent flare-up involving the infamous‘retention bonuses’ at AIG. In the midst of a major effort to design a reasonable andfeasible plan for relieving banks of their ‘toxic assets’ (which was itself filled with manydifferent accountability-related challenges), the primary policy actors had to contend witha media-fed public outrage by attempting to hold AIG ‘to account’ for what many (incor-rectly, as it turned out) perceived as a violation of the public trust and treasure. Executivecompensation restrictions had in fact been part of the ongoing deliberation of how todesign the troubled asset-relief programme (TARP) from the outset, but the issue wasplucked from a problem stream filled with many more (and less) significant issues, and theresulting ‘crisis’ generated a frenzied search for a quick-fix response from among thosefound in the stream of policy instruments that would satisfy the whirlwind that broughtturbulence to the political stream.12

While the AIG episode may prove to be exceptional in light of the attention it receivedand the extreme nature of the policy responses it drew, there is nothing in the publicrecord to indicate that a more reasoned (non-GCM-like) process is being applied inresponse to other issues in this policy domain. Faced with specific issues related to aparticular aspect of the financial crisis, policymakers will respond with accountability


10 For the original version of the model, see MD Cohen, JG March and JP Olsen, ‘A Garbage Can Model ofOrganizational Choice’ (1972) 17 Administrative Science Quarterly 1; see also JG March and JP Olsen (eds),Ambiguity and Choice in Organizations (Bergen, Universitetsforlaget, 1976); MD Cohen and JG March,Leadership and Ambiguity: The American College President, 2nd edn (Boston, MA, Harvard Business School Press,1986).

11 JW Kingdon, Agendas, Alternatives, and Public Policies (Boston, MA, Little Brown, 1984); see alsoG Mucciaroni, ‘The Garbage Can Model and the Study of Policy Making: A Critique’ (1992) 24 Polity 459.

12 See B Webel, ‘Ongoing Government Assistance for American International Group (AIG)’, CongressionalReport (Washington, Library of Congress Congressional Research Service, 1992); LG Thatcher, ‘ExecutiveCompensation Restrictions under the American Recovery and Reinvestment Act of 2009’ (2009) 41(3)Compensation Benefits Review 20.

mechanisms pulled from the policy stream that seems the best fit to deal with thenarrowly defined problem.

Put another way, the ambiguous nature of the rhetorical calls for ‘greater account-ability’ are producing the expected response (at least under the GCM): an ad hocproliferation of policy proposals that are incoherent and inconsistent at best. In someinstances we have reforms designed (intentionally or not) to strengthen oversight andcontrol—of both the regulated and the regulators! At the same time, demands for greater‘transparency’ and open deliberations are made of all parties. In other cases we findaccountability mechanisms aimed at ensuring that the internal decision processes (again,of both the regulated banking community and the regulators) follow a certain pattern andthat the targeted decision makers behave in an ‘ethical’ or appropriate way. Still otherresponses impose ‘high stakes’ performance standards and measures designed to directand ‘motivate’ the various agents and agencies involved.

Each of these policy responses makes sense in light of the narrow and specific nature ofthe problems drawn from the stream at a given time. The more general question iswhether, when taken together and assessed in their entirety, they can constitute an effectiveeffort to deal with the need for ‘greater accountability’ in the financial services domain.

C. Framing the Design Problem

If we are to develop solutions to the current financial crisis, we need to begin by articu-lating and framing the problem, and here we can start with a basic assumption about thecorporatised market that has been accepted by both political scientists and economistssince at least the 1930s: the central problems are those of creating and sustaining ‘goodgovernance’.13

As with all terms that are part of the common parlance of political dialogue (eg power,sovereignty), reference to the concept of governance requires some analytic clarity. Amongthose engaged in the analysis of government, however, the focus of attention is so wideranging that any study must assume an arbitrary position regarding the concept. So, formany, governance is ‘what governments do’—the tasks and functions they carry out as thelegitimate controllers of the machinery of the modern state.14 At the other extreme arethose who regard governance as ‘socio-cybernetic systems’ and ‘self-organising networks’which emerge as authoritative sources of control within and among all forms of organised


13 The use of the phrase ‘good governance’ may be troublesome for some, not merely for its obvious normativeimplications, but also due to its association with ‘neo-liberal’ policies of the World Bank and InternationalMonetary Fund. See, eg LS Finkelstein, ‘What Is Global Governance?’ (1995) 1 Global Governance 367; CH deAlcántara, ‘Uses and Abuses of the Concept of Governance’ (1998) 50 International Social Science Journal 105;TG Weiss, ‘Governance, Good Governance and Global Governance: Conceptual and Actual Challenges’ (2000)21 Third World Quarterly 795; M Doornbos, ‘“Good Governance”: The Rise and Decline of a Policy Metaphor?’(2001) 37 Journal of Development Studies 93; RV Aguilera and A Cuervo-Cazurra, ‘Codes of Good GovernanceWorldwide: What Is the Trigger?’ (2004) 25 Organization Studies 415; P Bourdieu, The Social Structures of theEconomy (Malden MA, Polity, 2005), 10–12. In the analytic exercise that follows I attempt to circumvent both thenormative and ideological implications of the concept.

14 See, eg R Rose, ‘On the Priorities of Government: A Developmental Analysis of Public Policies’ (1976) 4European Journal of Political Research 247.

life—from the family unit to the modern state and global networks.15 Taking a somewhatmiddle course are analysts such as Oliver E Williamson, who traces the study of gover-nance to the work of John Commons and Ronald Coase, and defines it as the examination‘of good order and workable arrangements’.16

For present purposes we will follow that ‘middle road’ definition and assume that thefocus of our policy design task is to articulate reforms that can be made to enhance the‘good order and workable arrangements’ that ‘govern’ the form and operations of today’sfinancial markets.

Another central tool for this design task is that of ‘regimes’, a concept often used bystudents of governance, whether they are focusing on states, networks or formal organisa-tions. In conventional discussions about politics, the term ‘regime’ is loosely applied totypes of political systems or styles of governance (eg democratic regimes, authoritarianregimes, Stalinist regimes), or the government of a country that has been ruled by someperson or party for an extended period (eg the Castro regime, the Communist regime).17

Among scholars who study governance, the term ‘regime’ is typically assigned to thosepolitically relevant social and economic arrangements that endure over time to form thesetting within which governments (and political systems in general) operate. More specifi-cally, what the term ‘regime’ means analytically depends on the scope, breadth and depthof the domain of governance action to which it is being applied. For some, regimesconstitute the basic moral order or (in Charles Taylor’s phrase) social imaginary18 thatinfluences the form, direction and force of governance. In Taylor’s sweeping historicalanalysis and critique of the modern ‘secular’ age, for example, the term regime is synon-ymous with the underlying ‘moral order’ of a society, and he regards changes and shift inregimes (ie social imaginaries) to be rare and revolutionary.

For others, regimes are reflected in the patterns of governance that emerge withinsettings where the traditional structures and mechanisms of government are not available.Students of world politics have paid growing attention to the role that both formal andinformal international regimes have played (and continue to play) in transnationalrelationships and the development of the global economy.19 Another group of scholars,


15 RAW Rhodes, ‘The New Governance: Governing without Government’ (1996) 44 Political Studies 652; seealso G Stoker, ‘Governance as Theory: Five Propositions’ (1998) 50 International Social Science Journal 17.

16 OE Williamson, ‘Visible and Invisible Governance’ (1994) 84 American Economic Review 323; OEWilliamson, ‘The Institutions of Governance’ (1994) 88 American Economic Review 75; OE Williamson, ‘TheEconomics of Governance’ (1998) 95 American Economic Review 1; see also JR Commons, ‘The Problem ofCorrelating Law, Economics and Ethics’ (1932) 8 Wisconsin Law Review 3; RH Coase, ‘The Nature of the Firm’(1937) 4 Economica 386.

17 There is notably a negative, judgemental sense implied in the popular use of the word ‘regime’ evidenced bythe fact that the concept is rarely applied to US regimes (typically labelled ‘administrations’) or manyparliamentary regimes (which are noted as ‘governments’ in the media).

18 C Taylor, Modern Social Imaginaries (Durham, NC, Duke University Press, 2004); C Taylor, A Secular Age(Cambridge, MA, Belknap Press of Harvard University Press, 2007).

19 Eg OR Young, ‘Review: International Regimes: Toward a New Theory of Institutions’ (1987) 39 WorldPolitics 104; OR Young, ‘Regime Dynamics: The Rise and Fall of International Regimes’ (1982) 36 InternationalOrganization 277; OR Young, ‘International Regimes: Problems of Concept Formation’ 32 World Politics 331, SDKrasner, ‘Structural Causes and Regime Consequences: Regimes as Intervening Variables’ (1982) 36 InternationalOrganization 185; SD Krasner, ‘Regimes and the Limits of Realism: Regimes as Autonomous Variables’ (1982) 36International Organization 497; JG Ruggie, ‘Reconstituting the Global Public Domain—Issues, Actors, andPractices’ (2004) 10 European Journal of International Relations 499; JG Ruggie, ‘International Regimes,Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’ (1982) 36 InternationalOrganization 379; EB Haas, ‘Words Can Hurt You; or, Who Said What to Whom About Regimes’ (1982) 36International Organization 207.

many of whom are associated with the public choice perspective that spans economics andpolitical science, regard a regime as the ‘logic’ of governance (eg Madisonian, Weberian)that develops within a constitutional ordering of political and social relationships.20 At aneven more specific level, students of regulatory policy apply the term regimes to the rangeof strategic approaches used within a particular policy arena (eg utility pricing, telecom-munications).21

For present purposes, the concept of regime will be applied to the two governancearrangements that are most salient in the reform of the financial services sector. Aregulatory regime involves arrangements of institutions, norms, values and relationshipsintended primarily to exercise some degree of control over the governed acts and actors. Itis somewhat synonymous with Jessop’s ‘regulation approach’ view of capitalist economies,involving ‘economic and extra-economic institutions and practices which help to secure, ifonly temporarily and always in specific economic spaces, a certain stability and predict-ability in accumulation—despite fundamental contradictions and conflicts generated bythe very dynamic of capital itself ’.22

A regulatory regime can take an explicit form, as manifested in legal and bureaucraticframeworks that generate and enforce laws and rules,23 or it can take a more implicit formin the development of a Foucauldian ‘governmentality’ that (in its most extreme) fosters asense of panoptic oversight and monitoring.24

Among the most useful, design-relevant explications of regulatory regimes is thatoffered by HRB in their watershed book, The Government of Risk.25 Although their studydirectly addresses social risk policies in the UK, their framework has a broader applica-bility through its focus on the variations of means and mechanisms used to controlindividual and collective risk behaviour across several different policy domains, includingrelated to the domestic and global marketplace. Central to the HRB construct (see Figure2) are three core forms of ‘control components’ used to deal with risk within an examineddomain: information gathering; standard setting; and behaviour modification. These arethen explicated in terms of the context (type of risk, public attitudes, organised interests)and content (size, structure and style of regulatory effort). The result is an analytic framedeveloped to describe (for heuristic purposes) and empirically examine (for research and


20 See E Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge,Cambridge University Press, 1990); see also E Schlager and E Ostrom, ‘Property-rights Regimes and NaturalResources: A Conceptual Analysis’ (1992) 68 Land Economics 249. A classic expression of the public choiceperspective does not rely on the concept of ‘regime,’ but implies it in considering American public adminis-tration from both a Madisonian and Weberian (‘Wilsonian’) paradigm; see V Ostrom, The Intellectual Crisis inAmerican Public Administration, rev edn (Tuscaloosa, AL, University of Alabama Press, 1974).

21 Eg R Schmalensee, ‘Good Regulatory Regimes’ (1989) 20 Rand Journal of Economics 417; DL Weisman,‘Superior Regulatory Regimes in Theory and Practice’ (1993) 5 Journal of Regulatory Economics 355; J Rust and GRothwell, ‘Optimal Response to a Shift in Regulatory Regime: The Case of the US Nuclear Power Industry’(1995) 10 Journal of Applied Econometrics S75.

22 B Jessop, ‘Survey Article: The Regulation Approach’ (1997) 5 Journal of Political Philosophy 287, 288.23 The ‘regulatory state’ concept that reflects this view is found in G Majone, ‘From the Positive to the

Regulatory State: Causes and Consequences of Changes in the Mode of Governance’ (1997) 17 Journal of PublicPolicy 139; G Majone, ‘The Regulatory State and Its Legitimacy Problems’ (1999) 22 West European Politics 1; GMajone, ‘Regulation in Comparative Perspective’ (1999) 1 Journal of Comparative Policy Analysis 309; see also MMoran, ‘The Rise of the Regulatory State in Britain’ (2001) 54 Parliamentary Affairs 19.

24 See N Rose and P Miller, ‘Political Power Beyond the State: Problematics of Government’ (1992) 43 BritishJournal of Sociology 173; N Rose, ‘Government and Control’ (2000) 40 British Journal of Criminology 321; NSRose, Powers of Freedom: Reframing Political Thought (Cambridge, Cambridge University Press, 1999).

25 C Hood, H Rothstein and R Baldwin, The Government of Risk: Understanding Risk Regulation Regimes(Oxford, Oxford University Press, 2001).

theory development/testing purposes)26 regulatory regimes aimed at risk. In addition, thedimensions used in the framework can be articulated in forms that facilitate at leastcomparative (if not even more systematic) assessment. As significant, those interested ingenerating solutions to problems plaguing a particular policy domain can certainly findvalue in the design elements implied in the HRB analytic scheme.27

Within the governance setting there is a second and quite necessary complement to theregulatory regime that fosters a sense of responsibility and obligation among actors in thedomain. This accountability regime involves arrangements and ‘assemblages’28 of institu-tions, norms, values and relationships related to the fact that governance involves more


26 See C Hood and H Rothstein, ‘Risk Regulation under Pressure: Problem Solving or Blame Shifting?’ (2001)33 Administration & Society 21.

27 D Levi-Flaur, ‘Regulatory Capitalism: The Dynamics of Change Beyond Telecoms and Electricity’ (2006) 19Governance 497.

28 See S Sassen, ‘Neither Global nor National: Novel Assemblages of Territory, Authority and Rights’ (2008) 1Ethics & Global Politics 61.

than a web of control components and associated mechanisms; governance is based asmuch on some normative order—a ‘moral community’ context or ‘accountability space’within which the governed population (of acts and actors) necessarily operates. It is withinthat regime space that standards of appropriate and ethical behaviour—in very generalterms, expectations of responsible behaviour—are established and sustained, and wheretrust can be nurtured.

Seen from a domain perspective, governance primarily (but not exclusively)29 involvesboth the control of risk and the management of expectations. A governance effort involvesboth, and an effective (‘good’) governance effort (which is the assumed goal of policyreform) is one that treats the regimes that address these two functions as complementary.

Applying this two-regime perspective to the current efforts to reform the financialservices market, it can be argued that almost all reform efforts have been focused on theregulatory aspects of the general governance problem. In part, this contention reflects the‘blame game’ approach that has dominated explanations of what went wrong in thefinancial sector; in the aftermath of a crisis, when all or most systems have failed or seemin disarray, the regulatory mechanisms (and regulators) provide easy targets for blamegamers. In addition, the concentration on regulatory regime reforms reflects the fact that(re)designing control regimes seems less challenging than designing accountabilityregimes.

A more fundamental view of the problem is conceptual. The difficulty with designingreforms for the accountability regimes of governance can be traced to our inability tounderstand and appreciate what this important area of governance entails. In theremainder of this chapter I explore the nature of the accountability regime with the intentof constructing a preliminary framework for the design of reform policies that can offer amore effective approach to solving the governance issues that plague that arena. While thegoal is an analytic frame of utility and power equal to the HRB scheme, what followsshould be regarded as foundational at best.

D. Mechanisms and Moral Standards

Despite the drawbacks of following the conventional blame gaming approach to deter-mining the problems of a policy domain in crisis, there are some insights to be gained byexamining the resulting political rhetoric and policy responses—especially their commonfocus on the need for ‘greater accountability’.

In the talk about reform, accountability emerges in two very different but interrelatedconversations. In one conversation, accountability (or the lack thereof) is being discussedas a key factor in bringing about the ‘meltdown’ of economic relationships built aroundthe high-flying financial services industry. Accountability, in some form or another, isviewed by the participants as a problem—perhaps the problem—that needs addressing.

The other conversation (occurring almost simultaneously) is focused on solutions


29 Governance, of course, serves many other purposes. See, eg R Rose, What Is Governing? Purpose and Policy inWashington (Englewood Cliffs, NJ, Prentice Hall, 1978); R Rose, ‘Models of Governing’ (1973) 5 ComparativePolitics 465; BG Peters, The Future of Governing: Four Emerging Models (Lawrence, KS, University Press of Kansas,1996); BG Peters and J Pierre, ‘Governance without Government? Rethinking Public Administration’ (1998) 8Journal of Public Administration Research and Theory 223.

rather than problems. The major refrain here—repeated constantly in more rhetoricalsettings—is the need for ‘greater’ and ‘more’ accountability as a (if not the) solution tothat very same crisis.

This observation about the role of accountability as both problem and solution—causeand cure—begs for clarification if we are to make some sense of the accountabilityregime’s place and role in governance. What does accountability mean to those engaged inthese searches for causes and cures, and in what way(s) do various views of accountabilityimpact on our understanding of the financial crisis and/or our responses to it?

Interestingly, the myopic obsession with regulatory control comes into play at thisjuncture. In discussions dealing with the search for causes of the crisis (ie the ‘blamegame’), the failure of accountability is typically (if not always) articulated in terms of somespecific institutional mechanism or policy instrument failure. The list of suspected culpritsranges from the insufficiency of basic managerial controls and internal corporate gover-nance mechanisms to the lack of transparency and due diligence, the lax enforcement ofbanking and securities regulations, and the absence of effective oversight of regulators byexecutive, legislative or judicial officials. Shortcomings abound in all these assessments ofthe problems—shortcomings in the sense that the regulator or regulated party is just notliving up to expectations. Regulatory regime control components overlap with—perhapsare actually embedded in30—the accountability regime. Each and all are regarded as partof an accountability infrastructure composed of various tools (eg oversight, audits, inspec-tions, investigations, chains of command) that share a defining characteristic thatdistinguished them from other control components: each operates by establishingaccount-giving relationships among at least two parties in an organised effort thataddresses the need to deal with unaddressed or unfulfilled expectations.31

Viewed narrowly as account-giving mechanisms or instruments, accountability is ameans for the management of expectations and takes on the characteristics of a technicalfeature of the financial marketplace, a functional (often institutionalised) part of theeconomic, political and social relationships that comprise this sector. It follows that whenthe focus turns to failures of accountability (that is, these ‘mechanisms’) as the cause of thecurrent crisis, attention necessarily turns to the absence or breakdown of social


30 M Granovetter, ‘Economic Institutions as Social Constructions: A Framework for Analysis’ (1992) 35 ActaSociologica 3; M Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1986) 91American Journal of Sociology 481.

31 The idea of an ‘account-giving relationship’ demands some clarification at this juncture in regard to fourpoints. The first is to highlight that we are dealing with social relationships, and therefore these have to beunderstood as fundamentally social mechanisms despite the fact that we often perceive them too narrowly instrictly formal or legalistic terms. Secondly, although frequently associated with the logic of principal-agentrelations (especially when operationalised in academic models), such relationships do not necessarily involvehierarchical or super/subordinate arrangements. At least in theory (and, more often than is acknowledged, inpractice), account-giving relations can be horizontal as well as vertical, bottom-up as well as top-down—andeven circular in form (eg the ‘reflective’ practitioner). Thirdly, these relationships are based as much (if notmore) on expectations as they are in actions. Often it is the anticipation of claims on one’s account-givingcapacity that determines the effectiveness of an accountability mechanism. Anxiety about who might seek anaccount, what action one might be held to account for and when one might be called to account—all play majorroles in shaping the relevant relationships. For more on this point, see SL Darwall, The Second-person Standpoint:Morality, Respect, and Accountability (Cambridge MA, Harvard University Press, 2006). Finally, theseaccount-giving relationships cannot be viewed in isolation from other social relations, including otheraccount-giving claims. The existence of multiple, diverse and potentially conflicting expectations is itself to beexpected in the world of accountability mechanisms.

relationships and expectations. The ‘cure’ implied in that analysis most often findsexpression in proposals to repair or replace the failed or damaged mechanisms.

However, such mechanisms must be regarded as only part of the accountability regimeconstruct. An alternative dimension of accountability is also at work in the cause/curediscussions, one that regards accountability as playing more of a normative role than atechnical one. Here the talk is not about the failure of mechanisms or instruments ofaccount-giving, but rather the failure of more amorphous conditions that foster expec-tation management, such as a moral sense of responsibility, fiduciary obligations,responsiveness and liabilityetc. These reflect the idea of accountability as providing themoral, normative setting for the operation of financial markets. The emphasis here is onthe premise that any set of social relationships—especially those involving complex inter-actions and transaction such as those found in global financial markets—requires somecommitment to a functional and effective set of expectations in the form of rules, normsand mores. Among those conversing from this perspective, it is the absence or ineffec-tiveness or collapse of these normative (that is, ‘moral’) standards that is at the heart of thecurrent crisis. The implied ‘cure’ would be whatever policies might restore or reconstructthat normative infrastructure.32

Figure 3 attempts to summarise the implications of this distinction (simplified asaccountability-as-mechanism and accountability-as-setting) for the discussions about thecauses and cures of the present crisis. The implications of this framework for designingpolicy responses to the financial crisis will be discussed in the next section, but there aretwo additional observations that require attention before moving to that point.

First is the extent to which one of the perspectives dominates the most important of the


32 Cf J-E Lane, Public Sector Reform: Rationale, Trends and Problems (London, Sage Publications, 1997); also PJMay, ‘Regulation and Compliance Motivations: Examining Different Approaches’ (2005) 65 Public Adminis-tration Review 31; PJ May, ‘Regulatory Regimes and Accountability’ (2007) 1 Regulation and Governance 8.

Figure 3. Accountability as cause/cure.

conversations about the financial crisis. Where those conversations really ‘matter’—inthose venues where policymakers talk about ‘causes and cures’—the mechanism per-spective drowns out the normative infrastructure (setting) view. In this and other areaswhere the issue is the breakdown of an ongoing system, ‘technical’ explanations usuallyhold sway, and not necessarily because they are more credible or convincing. Rather, ascomplements to the regulatory control regime, they tend to be ‘easier’ to grasp concep-tually and have the benefit of generating relatively quick solutions. If the problem isdetermined to be lax enforcement of banking regulations, then enhance the enforcementpower of regulators and back it with more funding. If the ‘problem’ is lack of transparencyin the operations of hedge funds or private equity firms, then require more reporting andopenness. In both examples, there is a clear sense that regulatory control will be enhanced,but only a vague hope for the more responsible behaviour on the part of the regulatedparties. Nevertheless, such reforms are proffered as having enhanced accountability.Whether they actually do have (that is, whether they foster more responsible behaviour) isan empirical question.

This leads to my second point, namely the ironic tendency of policymakers to rely onthe rhetoric of accountability in their rhetorical rationalisations for mechanism-focusedpolicy decisions. The justification for undertaking regulatory-based reforms is to create a‘more responsible’ market or to make certain actors ‘answerable’ and ‘liable’ for theiractions. There is an assumed effective link between the exercise of control and theenhancement of responsible behaviour—a link that has rarely been tested in the gover-nance context let alone empirically proved. Each of these rhetorical flourishes at minimumimplies the existence of that connection and begs the question about the need for somemoral community that provides a normative understanding of what constitutes(ir)responsible and (in)appropriate behaviour.

To summarise briefly, when it comes to accountability regime issues raised by thecurrent financial crisis, (i) there are at least two conversations taking place, one focused onthe role of accountability (or lack thereof) in creating the crisis (the ‘cause’ conversation)and the other positing accountability as a major part of the solution (the ‘cure’ conver-sation); (ii) beneath the surface of these conversations are two very different perspectiveson accountability, one perspective viewing it as social mechanisms and policy instrumentsrooted in ‘account-giving’ relationships (accountability-as-mechanism) and the otherseeing accountability as providing the moral setting for the market (accountability-as-normative infrastructure); (iii) among policymakers (the conversations that reallymatter), the mechanism view prevails as they seek to match control-based technicalsolutions to technical problems perceived as regulatory; but (iv) the rhetoric of account-ability-based reform remains normative-based and is tied to a sense that what is needed isbehaviour that is more responsible, responsive, answerable, etc among market actors.

Underlying the present effort is the belief that there is a more substantial case to bemade for taking the accountability-as-setting (normative infrastructure) view seriously,not only as part of a more general theory of policy domain governance, but also as thebasis for policies that can have a real impact on the future operations of global andnational financial markets. Putting that belief to work, however, requires that we developan HRB-like analytic frame that can do more than help us appreciate the importance ofthe accountability regime as part of governance. We need a framing that allows us to focuson those elements that comprise the accountability setting in order to facilitate efforts to


describe the regime, assess its effectiveness and (where possible) assist in the design ofsolutions to the broader governance problems.

E. Articulating Design Options

An effort to emulate the HRB framework for accountability regimes runs into animmediate problem, for the core components of accountability (as imagined here)encompass normative settings as well as ‘mechanisms’. While contextual factors play a rolein the HRB scheme, they do so as independent or intervening variables affecting the formand content of the core control-components. But, as noted below, in accountabilityarrangements many aspects of the setting are themselves core components of the regime.

Beyond including those setting factors as core components, our framing should meettwo additional, interrelated criteria. First, it should be empirically inclusive and capable ofencompassing the range of actionable options that are proposed to deal with theproblematic conditions ‘greater accountability’ is intended to address. Secondly, theoptions it includes should be problem relevant and expressly aimed at dealing with thecauses and/or conditions of the problematic situation. Excluded under this framingscheme would be pseudo-proposals that amount to mere symbolic expressions of the needfor reforms and those designed to solve problems outside the scope of policy problems.While symbolic gestures such as a rhetorical call for making the financial system moreaccountable may serve important political purposes (eg for the mobilisation or acquies-cence of publics),33 they would fall outside our frame unless accompanied by somearticulated agenda for reform. Similarly, options aimed at more fundamental changes (egchanging human nature or radically altering the general economic system) would beoutside the scope of the framing, given its ‘practical’ focus.

There are two major efforts to frame accountability regimes, the first relatingto reforms that reshape the context and conduct of accounting, auditing and otherfinancial management operations,34 and the second (more recent) examining the increas-ingly complex arena of nonprofits operating in a global context.35 Almost all treat


33 M Edelman, The Symbolic Uses of Politics (Urbana, IL, University of Illinois Press, 1964); M Edelman, Politicsas Symbolic Action: Mass Arousal and Quiescence (Chicago, IL, Markham Publishing, 1971)

34 The major work in this area is attributable to James Guthrie and Linda English at the University of Sydney.See L English and J Guthrie, ‘Public Sector Auditing: A Case of Contested Accountability Regimes’ (1991) 50Australian Journal of Public Administration 347; J Guthrie, ‘Critical Issues in Public Sector Auditing’ (1992) 7(4)Managerial Auditing Journal 27; J Guthrie, ‘Australian Public Business Enterprises: Analysis of ChangingAccounting, Auditing and Accountability Regimes’ (1993) 9 Financial Accountability and Management 101; LDParker and J Guthrie, ‘The Australian Public Sector in the 1990s: New Accountability Regimes in Motion’ (1993)2 Journal of International Accounting, Auditing and Taxation 59; see also J Broadbent and J Guthrie, ‘Changes inthe Public Sector: A Review of Recent ‘Alternative’ Accounting Research’ (1992) 5(2) Accounting, Auditing andAccountability Journal 3.

35 See the work of Alnoor Ebrahim and his colleagues: A Ebrahim, ‘Making Sense of Accountability:Conceptual Perspectives for Northern and Southern Nonprofits’ (2003) 14 Nonprofit Management andLeadership 191; A Ebrahim, ‘Accountability in Practice: Mechanisms for NGOs’ (2003) 31 World Development813; A Ebrahim and S Heerz, ;Accountability in Complex Organizations: World Bank Responses to Civil Society;,KSG Working Paper No RWP 07-060 (John F Kennedy School of Government, Harvard University, 2008),available at papers.ssrn.com/sol3/papers.cfm?abstract_id=963135; A Ebrahim, ‘Placing the Normative Logics ofAccountability In “Thick” Perspective’ (2009) 52 American Behavioural Scientist 885. See also L Jordan and PV

accountability as a variant of regulation and control, and not surprisingly are preoccupiedwith viewing it in ‘mechanism’ terms. As such, they fail to stress the distinction betweenthe different roles that such mechanisms play in regimes of control and regimes ofmanaged expectations (that is, responsibility). The task here is to construct a frameworkthat stresses that distinction.36

Turning specifically to the core components of the accountability regime, the range ofoptions for ‘greater accountability’ reforms can be usefully framed by focusing on twocommon features of most proposals: (i) the extent to which they seek to specify theactivity and actions of those being held accountable; and (ii) the degree to which theaccountable agent is given some degree of discretion to act (ie autonomy).

Of the four resulting core component types, the performative accountability reformsare the most closely associated with the accountability-as-mechanism perspective. Herethe assumption is that greater accountability requires the specification of certain actionsand behaviours which are to be mandated and enforced, typically by a governing authorityoutside the organisation. These reforms stress the control functions of accountability, andthey are not uncommon in the banking industry. They are so pervasive, in fact, that manyview them as the very definition of accountability. Nevertheless, what differentiates theseaccount-giving performatives from controls is the underlying intent that the performance


Tuijl (eds), NGO Accountability: Politics, Principles and Innovations (Sterling, VA, Earthscan, 2006); A Ebrahimand E Weisband (eds), Global Accountabilities: Participation, Pluralism, and Public Ethics (New York, CambridgeUniversity Press, 2007).

36 Cf JL Mashaw, ‘Accountability and Institutional Design: Some Thoughts on the Grammar of Governance’ inMD Dowdle (ed), Public Accountability : Designs, Dilemmas and Experiences (Cambridge, Cambridge UniversityPress, 2006).

Figure 4. Accountability regime’s core component types.

(conducting an audit, publishing the results, etc) will lead to responsible behaviour. Herethere is an implied link between a required behaviour and the sense of responsibility thatit is assumed to generate or awaken in the target population. The strength of this assumedlink is very high, and therefore clearly stated and strictly enforced reporting requirementsby a variety of regulatory and other oversight agencies are regarded as part of thenecessary infrastructure for conducting business in many of the world’s jurisdictions.37

Reforms based on the logic of managerial accountability differ from the performativein allowing greater discretion to the accountable agent while at the same time holding itaccountable to meeting a specified objective or standard. Reflecting the growing culturalacceptance of managerialism,38 it is based on the assumption39 that those ‘professionals’who operate regulated organisations are by definition (after all, they are professionals)predisposed to responsible behaviour once provided with guidance regarding the ends tobe achieved. A law or regulatory body might require, for example, that a bank chartered tooperate within a state or community commit at least x per cent of its loan portfolio tolocal businesses or individuals. The standard for conducting business is set, but how theygo about doing so is left to the bank and its management. This form of accountabilityassumes that those professionals who manage the financial institution will act, as Berleargued in 1932, ‘more as princes and ministers than as promoters or merchants’.40

While the mechanism perspective characterises both performative and managerial


37 R Ball, ‘Infrastructure Requirements for an Economically Efficient System of Public Financial Reporting andDisclosure’, Brookings–Wharton Papers on Financial Services No 1 (Washington, DC, Brookings Institution,2001).

38 The logic of this approach in the corporate world was first described by Berle and Means when theypresented their classic exposition of the transformation of the modern corporation into a professionallymanaged organisation. ‘A management may well insist on as free a managerial hand as possible as to how it shallrun its business,’ they observed. ‘Nor has anyone grudged managements this group of powers, not only in lawbut in ideology. No better principle in carrying on business has yet been worked out than to find able men andgive them the completest latitude possible in handling the enterprise’: AA Berle and GC Means, The ModernCorporation and Private Property (New Brunswick, NJ, Transaction Publishers, 1932) 60. See also ES Mason, ‘TheApologetics Of ‘Managerialism’’ (1958) 31 Journal of Business 1; LE Preston and JE Post, ‘The Third ManagerialRevolution’ (1974) 17 Academy of Management Journal 476; P Miller and T O’Leary, ‘Hierarchies and AmericanIdeals, 1900-1940’ (1989) 14 Academy of Management Review 250.

39 Although this assumption originated in the private sector, it has been critically examined most often withpublic sector contexts. On the private history of managerialism, the classics are J Burnham, The ManagerialRevolution (Bloomington IN, Indiana University Press, 1960) and AD Chandler Jr, The Visible Hand: TheManagerial Revolution in American Business (Cambridge MA, Belknap Press of the Harvard University Press,1977). The classic expression of a positive view of public sector managerialism was found in CJ Friedrich, ‘PublicPolicy and the Nature of Administrative Responsibility’ in CJ Friedrich and ES Mason (eds), Public Policy: AYearbook of the Graduate School of Public Administration of Public Administration, Harvard University(Cambridge MA, Harvard University Press, 1940). The recent new public management reforms that took root inNew Zealand, Australia, the UK and Canada had a strong managerial accountability component; see C Pollitt,Managerialism and the Public Services: Cuts or Cultural Change in the 1990s?, 2nd edn (Oxford, BlackwellBusiness, 1993); C Pollitt and G Bouckaert, Public Management Reform: A Comparative Analysis (Oxford, OxfordUniversity Press, 2000), A Cochrane, ‘From Financial Control to Strategic Management: The Changing Faces ofAccountability in British Local Government’ (1993) 6 Accounting, Auditing and Accountability Journal 30;C Campbell, ‘Does Reinvention Need Reinvention? Lessons from Truncated Managerialism in Britain’ (1995) 8Governance 479; C Hood, ‘Public Service Managerialism: Onwards and Upwards, or “Trobriand Cricket” Again?’(2001) 72 Political Quarterly 300.

40 AA Berle Jr, ‘For Whom Corporate Managers Are Trustees: A Note’ (1932) 45 Harvard Law Review 1365,1366–67. In the same publication (1377) he offers the following: ‘Most students of corporation finance dream ofa time when corporate administration will be held to a high degree of required responsibility—a responsibilityconceived not merely in terms of stockholders’ rights, but in terms of economic government satisfying therespective needs of investors, workers, customers, and the aggregated community. Indications, indeed, are notwanting that without such readjustment the corporate system will involve itself in successive cataclysms perhapsleading to its ultimate downfall.’

accountability approaches, the regulative and constitutive forms rely more on what can betermed an ‘accountable space’ perspective. Here accountability is viewed more as a generalcontext or setting—what Bourdieu terms a ‘field’41—within which relationships occurrather than as a specific relationship per se. These accountable spaces can be characterisedby both their structure and substance.

Structurally, they exist as arrangements within parameters set by a range of normativeconstraints in the form of general roles and rules that shape the relationships that takeplace within that space.42 Constitutive accountability reforms43 focus on the establishmentand adjustment of those parameters, effectively constituting (or reconstituting, as the casemay be) the environment within which accountable behaviour occurs. Again, we findthese types of reforms to be familiar in the financial markets. The roles and rules requiredby accountability ‘regimes’ for financial institutions vary depending on the ‘constitutionalsetting’ within which they operate. With both deregulation and liberalisation of bankinglaws over the past several decades, the number of such settings has multiplied. This hascreated opportunities for banks to ‘shop around’ for what they regard as more suitableaccountability regimes both domestically and globally.

Regulative accountability comes into play when the substance of those roles and rules isdetermined to call for the active monitoring and oversight of an accountable agent. Thelogic is drawn from the regulatory regime, but the design premise is different. Theassumption here is that the target population will be more ‘responsible’ in exercisingdiscretionary behaviour knowing that there is a regulatory agent overseeing what is takingplace in the accountability space. Parker uses the term ‘responsive regulation’ to capturethis approach:

Simple deterrence will often fail to produce compliance commitment because it does not directlyaddress business perceptions of the morality of regulated behaviour—it merely puts a price onnoncompliance, and the ability of that price to deter misconduct will depend on the operation ofthe deterrence trap. Responsive regulation, by contrast, seeks to build moral commitment tocompliance with the law.44

For example, the proposal to establish a consumer protection agency with jurisdiction overcredit products is in part designed to enforce ‘control’ provisions of the law. However, theagency is also intended well to monitor complaints about credit providers from consumersand even rate card services, thereby giving the financial institutions reason to consider amore responsible (‘customer friendly’) approach to doing business.

As the core components of accountability regimes, each of these stresses the need toestablish and foster responsibility (that is, expectations management) over the demand for


41 P Bourdieu, ‘The Social Space and the Genesis of Groups’ (1985) 14 Theory and Society 723; P Bourdieu andLJD Wacquant, An Invitation to Reflexive Sociology (Chicago, IL, University of Chicago Press, 1992).

42 N Fligstein, The Architecture of Markets: An Economic Sociology of Twenty-First-Century Capitalist Societies(Princeton, NJ, Princeton University Press, 2001), esp ch 4; see also A Preda, Framing Finance: The Boundaries ofMarkets and Modern Capitalism (Chicago, IL, University of Chicago Press, 2009); GF Davis, Managed by theMarkets: How Finance Reshaped America (New York, Oxford University Press, 2009).

43 Perhaps the most relevant and useful approaches to analysing these types of reform is found in the work ofElinor Ostrom and her colleagues, whose work has focused on solutions to the common pool resource problem.See E Ostrom, Understanding Institutional Diversity (Princeton, NJ, Princeton University Press, 2005); T Dietz,E Ostrom and PC Stern, ‘The Struggle to Govern the Commons’ (2003) 302 Science 1907; Ostrom, Governing theCommons, above n 20.

44 C Parker, ‘The “Compliance” Trap: The Moral Message in Responsive Regulatory Enforcement’ (2006) 40Law & Society Review 591, 592; see also I Ayres and J Braithwaite, Responsive Regulation: Transcending theDeregulation Debate (New York, Oxford University Press, 1992).

control. Even the form that comes the closest to a control mechanism—performativeaccountability—differs in purpose (if not in content) from the behaviour modificationmechanisms represented in the HRB frame. Consider, for example, the requirement insection 302 of the 2002 Sarbanes-Oxley Act45 that corporate CEOs and CFOs attach theirsignatures to mandated audit reports that essentially certifies the ‘appropriateness of thefinancial statements and disclosures contained in the periodic report, and that thosefinancial statements and disclosures fairly present, in all material respects, the operationsand financial condition of the issuer’. Contrast that requirement with a provision insection 401 that specifies the ‘annual and quarterly financial report . . . shall disclose allmaterial off-balance sheet transactions’ and ‘other relationships’ with entities that canmaterially have an impact on the financial condition of the issuer. The latter is an explicitinstruction seeking a behavioural change, while the former is at best an indirect attempt tofoster a more responsible approach to the way corporate executives do their jobs.

Of course, that type of distinction is often blurred by the fact that the two regimesoverlap in the overall scheme of governance. Recently imposed provisions to controlcompensation received by executives in US banks that received ‘bailout’ funding from theTARP can be regarded as driven by both regulatory and accountability drivers. Theregulatory aspects stress a combination of both standard setting and behaviour modifi-cation by the subject firms, but implied in the action is the message that those executiveswho are assumed to have played a role in the policy-precipitating crisis need to learn theirlesson and act more responsibly in the future.46

With the core components of the accountability regime established, and continuingin the attempt to emulate the HRB approach, we now turn to those factors that lead tovariations in accountability regimes across and within policy domains. As reflected inFigure 5, there are three likely sources that determine such variation: content, context andconditions.

Regarding content, as conceptualised here, accountability regimes are primarily aboutthe management of expectations, thus making variations of expectations extremelyimportant in the description, assessment and design (and reform) of domain governance.


45 For an examination of the role of accountability in provisions of Sarbanes-Oxley, see MJ Dubnick,‘Sarbanes-Oxley and the Search for Accountable Corporate Governance’ in J O’Brien (ed), Private Equity,Corporate Governance and the Dynamics of Capital Market Regulation (London, Imperial College Press, 2007).

46 There is a sense of collective indignation and retribution also associated with those efforts.

Figure 5. Framing the accountability regime.

Approaching expectations analytically is no simple task,47 given its sometimes implicitnature. For example, while it might be possible to articulate some legal requirements andgeneral standards of behaviour that we expect from domain actors (eg that they performtheir tasks with ‘due diligence’), there is also a more general, often unarticulated sense of‘responsible’ and ‘appropriate’ behaviour that plays an important role in accountabilityregimes.48 For present purposes, those more amorphous standards can be shifted to the‘context’ factor category, leaving ‘content’ to reflect expectations that have an explicitpresence in the regime.

Having put aside the unarticulated expectations, getting a useful analytic handle on theexpectations content of accountability regimes is still quite challenging. Expectations canvary from very specific requirements, often laid out in laws and regulations, to those suchas due diligence and fiduciary that involve very general standards (with real consequencesfor actions) applied from case to case. Beyond their specificity, other dimensions of expec-tations that come into consideration include (in no particular order):

— the scope of their coverage: for example, does the expectation for transparency applyto all behaviour within the domain or are some (for example, proprietary informa-tion) exempted?

— the distribution of expectations within the domain: does it apply to the entire popula-tion of targeted actors in a domain (eg all commercial banks) or only to those that are‘too big to fail’?

— the salience of a given expectation or set of expectations within the domain: just howimportant is the standard among the range of expectations applied in the domain?

— the stability of the expectation over time: is the standard expressed in an expectationgoing to endure over time, or does it shift from circumstance to circumstance—and, ifso, is there a pattern to that ‘shifting’?

— the source(s) of the expectation or standard: does it emerge from within the domain oris it imposed from outside, etc?

— the purpose or intended function of the expectation: is it regarded as a means for pro-moting integrity and trust among domain actors or is it focused on enhancing theefficiency or fairness of domain actor actions?

While not exhaustive, this list of content factors indicates how complicated accountabilityregimes can be—and how challenging the design task is likely to be as well. The situationis complicated further by the fact that context matters as much as content when it comesto accountability. For present purposes, we will differentiate between the more general(that is, background) context from the immediate circumstances having an impact on theoperations of the regime (see the discussion of ‘conditions’ that follows).

There are a number of relevant analytic approaches to the context of account-ability regimes that can be applied for this framing project. The ‘group-grid matrix’typology developed initially by Mary Douglas and extended by Aaron Wildavsky and


47 Eg MJ Dubnick and BS Romzek, ‘Accountability and the Centrality of Expectations in American PublicAdministration’ in JL Perry (ed) Research in Public Administration (Greenwich, CT, JAI Press, 1993).

48 The ‘logic of appropriateness’ factor in choice is likely to play a significant role in the further development ofthis scheme; see JG March and JP Olsen, ‘The Logic of Appropriateness’, ARENA Working Papers WP04/September (2004) 28, reprinted in M Moran, M Rein and RE Goodin (eds), Oxford Handbook of Public Policy(Oxford, Oxford University Press, 2006); JG March and JP Olsen, Democratic Governance (New York, Free Press,1995).

others49 highlights the variation in expectations that emerges from five cultural orienta-tions that emerge from differences along two dimensions: the extent to which oneperceives the world from a vantage point that stresses a collective (high group) orindividual (low group) approach to problems, and the extent to which one regards oneselfas constrained (high grid) or allowed discretion to act (low grid) by the demands ofsociety. The four major types of actors that emerge from this framework relate to expecta-tions differently, ranging from the egalitarian, whose expectations are shaped by a strongidentity with group values and a high sense of efficacy, to the fatalist, whose expectationsare neither coherently organised nor actively pursued. Between the two extremes are thecultures of the market (individualist) and the organisation (hierarchist).

Alternatively, Pierre Boudieu’s view of social contexts as ‘fields’ of often competing‘forces’ can provide significant insights into the factors that shape expectations andshape/drive the accountability regime. In his examination of economic markets, forexample, he attributes the decisions of various actors to their ‘positions’ within the fieldsas well as their ‘dispositions’ (which he often terms ‘tastes’, but which can be treated asexpectations) related to the choices and options before them.50

Which of these (or other)51 models of context variations will prove most useful withinthis regime framework awaits further exploration. What needs to be emphasised is thatany framework for designing financial market reforms must take into account thevariability of accountability regimes across different cultures.

The same holds true for ‘conditional’ factors—the more immediate political, economicand social circumstances—in which reforms would be implemented. The HRB framing ofregulatory regime context is relevant here. Among the factors they highlight are threemajor sources of ‘pressure’ at work within risk regulation regimes: market-failurepressures, which generate demands for pre-emptive or corrective policies; opinion-response pressures emanating from the general public; and interest-driven pressures,which reflect stakeholder demands.52 In addition, the current forms and styles ofpolicy-making styles in different countries are an essential set of factors that requireattention.53

Of course, what is provided here is merely a preliminary framing that requires further


49 M Douglas, Risk and Blame: Essays in Cultural Theory (London, Routledge, 1992); M Douglas, ‘FourCultures: The Evolution of a Parsimonious Model’ (1999) 47 Geojournal 411; RJ Ellis and M Thompson (eds),Culture Matters: Essays in Honor of Aaron Wildavsky (Boulder CO, Westview Press, 1997); A Wildavsky, ‘CulturalTheory of Responsibility’ in J-E Lane (ed), Bureaucracy and Public Choice (London, Sage, 1987); A Wildavsky, ‘ACultural Theory of Budgeting’ (1988) 11 International Journal of Public Administration 651; A Wildavsky, ‘ACultural Theory of Leadership’ in B Swedlow (ed), Cultural Analysis. Volume 1. Politics, Public Law and Adminis-tration (New Brunswick NJ, Transaction, 2006); see also C Hood, The Art of the State: Culture, Rhetoric, andPublic Management (Oxford, Clarendon Press, 1998). For an excellent overview, see V Mamadouh, ‘Grid-groupCultural Theory: An Introduction’ (1999) 47 Geojournal 395.

50 P Bourdieu, Outline of a Theory of Practice (Cambridge, Cambridge University Press, 1977); Bourdieu, aboven 41; P Bourdieu, The Logic of Practice (Stanford CA, Stanford University Press, 1990); Bourdieu, above n 13.

51 Eg Y Wiener, ‘Forms of Value Systems: A Focus on Organizational Effectiveness and Cultural Change andMaintenance’ (1988) 13 Academy of Management Review 534; G Hofstede, ‘The Cultural Relativity of Organiza-tional Practices and Theories’ (1983) 14(2) Journal of International Business Studies 75; G Hofstede, ‘CulturalConstraints in Management Theories’ (1993) 7 Academy of Management Executive 81; G Hofstede, ‘Attitudes,Values and Organizational Culture: Disentangling the Concepts’ (1998) 19 Organization Studies 477; MJDubnick, ‘Public Service Ethics and the Cultures of Blame’, Fifth International Conference of Ethics in the PublicService, Brisbane, Australia (1996).

52 Hood et al, above n 25, 61–67.53 RE Löfstedtand and D Vogel, ‘The Changing Character of Regulation: A Comparison of Europe and the

United States’ (2001) 21 Risk Analysis 399, especially the contribution by Renn.

elaboration and application to current accountability regimes. Only through enhancingour capacity to describe the elements of accountability regimes can the design of effectivereforms progress to the next stage.

F. Working on Design Principles

That ‘next stage’ is a critical one, for, having established the conceptual foundations forunderstanding the design of governance and its associated regimes, we face the task ofarticulating design principles that can guide the policy reform effort. Some of thoseprinciples are already implied in the governance approach and regime frameworksthemselves, but others require further articulation and testing before they can proveuseful.

The very idea of ‘design’ used here is both analogical and metaphorical. Analogically,we are engaged in a process not unlike that undertaken by designers in a number offields—from the artist and craftsperson to the architect and engineer. For them, as for us,the task is to develop a plan for putting the material and nonmaterial elements at ourdisposal to work to achieve some preconceived ‘notion’ in the form of a sculpture, product,house or bridge. Our notions take the form of public policies.

‘Policies are the first expressions and guiding images of normative thinking and action,’noted Eric Jantsch. ‘In other words, they are the spiritual agents of change—change notonly in the ways and means by which bureaucracies and technocracies operate, but changein the very institutions and norms which form their homes and castles.’54 In that sense,design is an appropriate metaphor for the creative act—the development of ‘spiritualagents of change’—that the process involves. This is captured by the very concept of policyanalysis as a ‘design science’,55 which seems oxymoronic at first. What bridges the art andscience are those principles that guide the design project.

For present purposes, design principles are of three types: logical, conceptual andstrategic. The principles related to the logic of policy reform are reflected in the gover-nance perspective offered earlier in this chapter. Reform of a policy domain such as thefinancial markets can be approached through a variety of logics, each reflecting a generaltheoretical perspective that might be regarded as little more than a particular (albeit morestructured and formalised) view of some participants in the blame game.56 From econo-mists we have a plethora of such logics (for example, drawn from basic market failure57

and rational expectation theories58 to those stressing more popular insights regarding


54 E Jantsch, ‘From Forecasting and Planning to Policy Sciences’ (1970) 1 Policy Sciences 31, 32.55 HD Lasswell, ‘The Emerging Conception of the Policy Sciences’ (1970) 1 Policy Sciences 3; Dror, above n 7.56 Cf PC Light, The Tides of Reform: Making Government Work, 1945–1995 (New Haven, CT, Yale University

Press, 1997).57 FM Bator, ‘The Anatomy of Market Failure’ (1958) 72 The Quarterly Journal of Economics 351; JR Davis and

JR Hulett, An Analysis of Market Failure: Externalities, Public Goods, and Mixed Goods (Gainesville, FL, UniversityPresses of Florida, 1977); however, see RO Zerbe Jr and HE McCurdy, ‘The Failure of Market Failure’ (1999) 18Journal of Policy Analysis and Management 558; RO Zerbe Jr and H McCurdy, ‘The End of Market Failure’ (2000)23(2) Regulation 10.

58 JF Muth, ‘Rational Expectations and the Theory of Price Movements’ (1961) 29 Econometrica 315;G Corsetti, P Pesenti and N Roubini, ‘Paper Tigers?: A Model of the Asian Crisis’ (1999) 43 European EconomicReview 1211.

‘animal spirits’59 and irrational exuberance60). From the world of political science emergesthe logic of various ‘regulatory capture’ and other ‘government failure’ theories.61 Theperspective offered here focuses on the notions of governance (mostly drawn from thestudy of public management reform) and regimes (from the study of international organi-sations), but also relies on the work of economic sociologists and critical theorists whoemphasise the importance of governmentality (from the work of Michel Foucault)62 andembeddedness (initially articulated by Karl Polanyi).63

Although the logic of governance reform was generally touched upon here, much ofthis chapter has been explicitly devoted to dealing with the conceptual ‘principles’ thatemerged from the framing of the regimes. By positing an alternative conceptualisation ofaccountability as a regime, I am (by implication) offering a normative reordering of whatconstitutes the operations of governance of (and through) responsible action within thepolicy domain.

Despite seeming more like firm directives, the strategic aspects of policy designprinciples are perhaps best regarded as working hypotheses—ideally in the form oftestable assumptions—that attempt to apply the logic and conceptual elements of thereform effort to the problematic domain. Design principles applicable exclusively to theregulatory regime have been presented in a variety of forms depending on the goal of thepresenter. For some it is a matter of designing policies that are more likely to pass musterwith policymakers. The guidance they offer is addressed to the rule-designing staff ofregulatory agencies and is typically more oriented to meeting political requirements thanto developing effective solutions to governance problems. For them, the design principlesinclude

— clarity and precision of legislation;

— adherence to the general objects and spirit of the empowering legislation;

— not unduly trespassing on personal rights and liberties;

— not reversing the onus of proof in criminal proceedings; and

— ensuring protection from self-incrimination.64


59 GA Akerlof and RJ Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Mattersfor Global Capitalism (Princeton, NJ, Princeton University Press, 2009).

60 RJ Shiller, Irrational Exhuberance, 2nd edn (Princeton, NJ, Princeton University Press, 2005).61 BM Mitnick, The Political Economy of Regulation: Creating, Designing, and Removing Regulatory Forms (New

York, Columbia University Press, 1980); J Le Grand, ‘The Theory of Government Failure’ (1991) 21 BritishJournal of Political Science 423; G Tullock, A Seldon and GL Brady, Government Failure: A Primer in Public Choice(Washington DC, Cato Institute, 2002).

62 G Burchell, C Gordon and P Miller (eds), The Foucault Effect: Studies in Governmentality: With Two Lecturesby and an Interview with Michel Foucault (Chicago, IL, University of Chicago Press, 1991); M Foucault,‘Governmentality’ in G Burchell, C Gordon and P Miller (eds), The Foucault Effect: Studies in Governmentality:With Two Lectures by and an Interview with Michel Foucault (Chicago, IL, University of Chicago Press, 1991);M Bevir, ‘Foucault, Power, and Institutions’ (1999) 47 Political Studies 345; Rose (1999), above n 24; OJ Sendingand IB Neumann, ‘Governance to Governmentality: Analyzing NGOs, States, and Power’ (2006) 50 InternationalStudies Quarterly 651.

63 K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston, MA, BeaconPress, 1944). A considerable body of work—some previously cited—has been constructed around the notion ofembeddedness; see Granovetter (1986), above n 30; JK Frenzen and HL Davis, ‘Purchasing Behaviour inEmbedded Markets’ (1990) 17 Journal of Consumer Research 1; Granovetter (1992), above n 30; J Lie, ‘Sociologyof Markets’ (1997) 23 Annual Review of Sociology 341; GR Krippner, ‘The Elusive Market: Embeddedness and theParadigm of Economic Sociology’ (2001) 30 Theory and Society 775; G Krippnerand et al, ‘Polanyi Symposium:A Conversation on Embeddedness’ (2004) 2 Socio-Economic Review 109.

64 P Coghlan, ‘The Principles of Good Regulation’ in A Sidorenko and CC Findlay (eds), Regulation andMarket Access (Canberra, Asia Pacific Press, 2003) 16.

Policy analysts who take a less politically sensitive approach to regulatory design typicallywork within some variation of the following principles:

— setting down different types of ‘regulation’;

— considering if and when governments should regulate;

— deciding what forms of government action might best be adopted; and

— examining features that characterise poor or ineffective regulation.65

More common among economists who approach the design problem as policy analysisbut with a focus on what will work for the regulated (as opposed to the politicos) areprinciples similar to the following offered by Sappington for designing ‘incentive’-basedregulations:

1. Use incentive regulation to employ the firm’s superior information better.2. Prioritise regulatory goals and design incentive regulation to achieve stated goals.3. Link the firm’s compensation to sensitive measures of its unobserved activities.4. Avoid basing the firm’s compensation on performance measures with excessive

variability.5. Limit the firm’s financial responsibility for factors beyond its control.6. Adopt broad-based performance measures where possible, unless their variability is

excessive.7. Choose exogenous performance benchmarks.8. Allow the firm to choose among regulatory options, while recognising the interde-

pendencies among the regulatory options that are offered to the firm.9. Promise only what can be delivered, and deliver whatever is promised.10. Plan for the rare, unforeseen event, but minimise after-the-fact adjustments to the

announced regulatory policy.66

Proffered as advice to policymakers, these design principles are stated in simple terms, butunderlying them are difficult challenges reflecting the complex combination of logics,concepts and strategic norms. Some of these principles can be translated and transposedto the task of formulating policy options to change the accountability regime, but notwithout some conceptual and theoretical costs. Care must be taken in developing designprinciples relevant to the reform of accountability.

While this project is not at the stage where design principles can be summarised pithilyin short bullet point statements or sentences, some basic points have emerged that areindicative of the kinds of principles which are likely to emerge. Here are offered threeexamples:

Example 1: Reforms of global financial markets must address problems of governancewithin and across relevant policy domains.

This principle can easily be transformed into a question: does the proposed policy addressgovernance problems associated with the challenges of control and responsibility? Theimportance and necessity of this principle becomes obvious at a number of points. It isnot uncommon for those engaged in the policy design process to find themselvesenthralled with a particular policy approach or instrument to the point that he or she


65 Ibid.66 DEM Sappington, ‘Designing Incentive Regulation’ (1992) 9 Review of Industrial Organization 245, 269.

might lose sight of the policy objective. It is also within the nature of the policy-makingand policy-legitimation processes that compromises intended to guarantee passage caneffectively divert or replace key elements of the reform proposal. A demand for greaterdiscretion by the target population might be necessary for getting the policy adopted, butthe policy should be designed to prevent that provision from emasculating the reformeffort. Critics of both the recent bank bailouts and the economic stimulus packages havenoted the conflicts and flaws that emerged over time with both policies, but that is to beexpected of such emergency measures. However, in a highly fragmented policy-makingsystem such as the US, where partisan divides remain strong, adhering to this designprinciple is likely to prove difficult at best.

Example 2: Governance involves two interrelated functions: establishing control and facili-tating responsible action within the policy domain. The efforts made to fulfil bothfunctions are manifest in governance regimes. The operations of the two regimes shouldbe regarded as complementary.

This principle combines logical, conceptual and strategic guidance. The ‘bottom line’ ishighlighting the complementarity of the two regimes. This point emerges from the lessonsof more myopic governance reforms in financial markets over the past three decadeswhich, in turn, can be related to the current crisis. From the early 1980s, banking reformsin the US and abroad have been characterised as ‘deregulatory’ when seen from the narrowperspective of the regulation regime side of governance. The term ‘deregulation’ is, in fact,a misnomer,67 for what occurred was a reform of the governance arrangements underwhich banks operated. What took place has been more appropriately termed a‘liberalisation’ and/or harmonisation of the regulatory regime that governed the financialsector.68 The results were a slow but thorough loosening of the control features ofdomestic, transnational and international regulatory regimes.

Under the governance perspective offered here, one can argue that the lack of comple-mentary adjustments in relevant accountability regimes has proven central to creating thecurrent depression. Good governance does not necessarily require an optimal balancebetween control and responsibility, but too great a gap between the two regimes created byill-advised reforms can certainly generate systematic dysfunctions similar to those we nowendure.

Example 3: The values guiding the two regimes can differ. While regulatory control hasprimarily instrumental value, the facilitation of responsibility fostered by the account-ability regime can have both instrumental and intrinsic value.


67 Similarly, the term ‘re-regulation’ would not suffice since it implies a deregulation effort preceding it.68 GRD Underhill, ‘Markets Beyond Politics? The State and the Internationalisation of Financial Markets’

(1991) 19 European Journal of Political Research 197; S Claessens, GRD Underhill and X Zhang, ‘The PoliticalEconomy of Basle II: The Costs for Poor Countries’ (2008) 31 World Economy 313; GRD Underhill and X Zhang,‘Setting the Rules: Private Power, Political Underpinnings, and Legitimacy in Global Monetary and FinancialGovernance’ (2008) 84 International Affairs 535; BA Simmons, ‘The International Politics of Harmonization:The Case of Capital Market Regulation’ (2001) 55 International Organization 589; EJ Pan, ‘Harmonization ofUS–EU Securities Regulation: The Case for a Single European Securities Regulator’ (2003) 34 Law and Policy inInternational Business 499; G Majone, ‘Liberalization, Re-regulation, and Mutual Recognition: Lessons fromThree Decades of EU Experience’, Second Biennial Conference of the European Consortium for PoliticalResearch, Standing Group on Regulatory Governance, Utrecht, 5–7 June 2008; A Abiad and A Mody, ‘FinancialReform: What Shakes It? What Shapes It?’ (2005) 95 American Economic Review 66; M Giannetti, ‘FinancialLiberalization and Banking Crises: The Role of Capital Inflows and Lack of Transparency’ (2007) 16 Journal ofFinancial Intermediation 32.

There are cases where the exercise of control over the financial sector has been undertakenfor purposes other than the need for more effective governance of that domain, but rarelyis regulatory control assumed to hold some intrinsic value. Expropriation of banks for thepurpose of fulfilling an ideological or nationalistic programme69 notwithstanding,regulatory regime actions should be described and assessed according to their instru-mental value.

In contrast, while accountability regimes serve instrumental purposes, their role ingovernance may be for intrinsic value. Thus, a policy that seemingly has no substantialinstrumental value at all, such as the required restrictions on executive pay, plays a role inenhancing the public perception of a more accountable banking sector, and thereforeindirectly achieves an objective of governance reform, such as increasing confidence in thebanking sector. Or consider the value of policies insuring bank deposits, which play aninstrumental role in the regulatory regime as a means for assuring bank solvency whilebeing valued for enhancing accountability and an accompanying sense of bank securityand integrity. While critics of the policy note moral hazards created by the insurance (andthus question its instrumental value),70 their concerns are determined to be more thanoffset by the benefits generated by the assumed enhancement of integrity fostered byresponsible behaviour of the insured bank.

G. Concluding Comments

The task that initiated this project was to address the current financial crisis as a policydesign problem, and the intent was to develop some reasoned and reasonable paths toreform. ‘What is to be done?’ is the question of the hour, and most responses have unfor-tunately relied on the usual bag of policy tricks that many regard as merely spot repairsthat will keep the system going for long enough to get to the next crisis. As noted earlier, itis a good example of the ‘garbage can model’ at work: streams of problems, policysolutions and political demands converge at some point and some form of policy emergesfrom the mix. At times we get lucky and the process works—producing policies that satisfyour needs for at least a short-term resolution. If we are really fortunate, that solution sticksfor an extended period.

That seems to be the situation we face at the moment concerning reform of thefinancial services market. At present, policymakers are relying on the advice given byanalysts who specialise in policy repairs and quick fixes rather than policy design. Thereasons are many, but they certainly include significant time pressures as well as thedynamics of the blame game, which offers up all sorts of targets for so-called reformpolicies.

To engage in a more substantial policy design effort under crisis conditions might beregarded as a waste of time and energy. Significant policy design requires a criticalrethinking of how we approach the collapse of the financial markets, the subsequent


69 MC Lewis, ‘International Bank Expropriations: The Need for a Level Playing Field’ (1985) 4 Annual Reviewof Banking Law 237; L Trotsky, The Transitional Program (London, Workers’ Revolutionary Party, 1938).

70 DC Wheelock and SC Kumbhakar, ‘Which Banks Choose Deposit Insurance? Evidence of Adverse Selectionand Moral Hazard in a Voluntary Insurance System’ (1995) 27 Journal of Money, Credit & Banking 186; GPJO’Driscoll, ‘Bank Failures: The Deposit Insurance Connection’ (1988) 6(2) Contemporary Policy Issues 1.

damage it caused to economic stability and the possibility of economic growth. In theearliest stages of the design effort, description and theorising about the problem takepriority over when the primary goal is to establish an understanding of the domain and itsproblems. At this point, it is difficult to pull back from the demands for more than mereanalysis. Richard Posner, the polymath who combines his full-time position as a majorAmerican jurist with his work as a well-known public intellectual, published a careful andthoughtful examination of the crisis in the spring of 2009 and maintained an ongoingdiscussion of his views on a widely read blog.71 Pushed to suggest long-term solutions, hesteadfastly refused, noting that it is too early to make suggestions that match hisassessment that there is something fundamentally wrong with the US economy. He is, inthat sense, the model policy designer.

I approach the present project with a similar perspective, engaging in a critical (andtime-consuming) rethinking of the way we approach the problems of the financialmarkets and attempting to construct a framework that might prove useful in developing along-term strategy for reform of that sector. What I have provided here is a perspectiveemphasising the central role that governance plays in this policy domain, and an attemptto make the case for a more balanced approach to governance that encompasses the needfor greater accountability as well as more regulatory control. Emulating the work of Hood,Rothstein and Baldwin on regulatory regimes, I have presented the basic framing forunderstanding accountability regimes. Although that part of the project remains to becompleted, I have also addressed the need for policy design principles that reflect thecomplex nature of the governance arrangements that are in need of major reform.

More work remains to be done.


71 Richard Posner; the blog is located at correspondents.theatlantic.com/richard_posner/.

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